Full war chest means tax cuts on the way

Tax cuts appear to be entrenched on next year's election agenda after the mid-year budget review showed revenue pouring into the Federal Government's war chest.

The Treasurer, Peter Costello, yesterday held out the prospect of tax relief for those on the top marginal tax rate when he released the Government's mid-year review of its budget and economic forecasts.

The review more than doubled this year's surplus to $4.6 billion from the $2.2 billion predicted in the May budget and almost tripled the estimate for the 2004-05 surplus to $3.8 billion, leaving plenty of scope for a election-year tax cut.

A surge of tax revenue, especially company tax, has swelled Treasury coffers, reflecting a stronger economy.

In the review, Mr Costello lifted the Government's official growth forecast for this financial year to 3.75 per cent, from the 3.25 per cent tipped in May.

Asked if the upgraded budget surpluses would allow tax cuts, Mr Costello spoke of his desire to lift the top marginal tax rate - now $62,500 - to $75,000. He said it was "a source of frustration" that his plan to introduce this top threshold as part of the mid-2000 GST tax overhaul was thwarted.

The Opposition Leader, Mark Latham, has said those on the top rate deserve tax relief and Mr Costello said he now expected Mr Latham to "support our position of lifting that threshold."

But Mr Latham said yesterday Labor had a "commitment to improve services and some tax relief for low and middle-income taxpayers."

As Mr Costello unveiled his bumper surpluses, the Reserve Bank governor, Ian Macfarlane, said he was sorry about the pain higher rates were causing new borrowers when he appeared before a parliamentary committee.

"I feel sorry for people who have just taken out a mortgage and interest rates go up," he said. "But you can't really make a policy on the basis of that."

Mr Macfarlane hinted interest rates might plateau at their current levels while the economy absorbed the impact of two consecutive rises but he said the recent rate rises would not be a "very big squeeze" for established home owners.

Chris Richardson, a director of the private forecaster Access Economics, said the 2004-05 budget surplus was likely to be $2 billion bigger than the one forecast yesterday, because it had underestimated the likely Reserve Bank dividend.

"It leaves room for a tax cut. I still expect a tax cut for the next election," he said.

The upward revision to this year's budget surplus was almost equivalent to the cost of Mr Costello's much derided "milkshake and sandwich" tax cuts of $4 a week for average Australians unveiled at the last budget.

Some economists have warned that tax cuts and more Government spending may over-stimulate the economy next year and force the Reserve to raise interest rates to stop the economy overheating.

But Mr Macfarlane said tax cuts would not concern him. "When I look at Australia and I put it in that perspective I've got no problems at all," he said . "The magnitudes are just not big enough to observe any effect on monetary policy."

Mr Costello also shrugged off any conflict between providing tax cuts and keeping interest rates low.

But there was a marked difference of opinionon inflation, with Treasury forecasting it to fall as low as 1.75 per cent next financial year while the Reserve Bank expects it to be 2.5 per cent by mid-2005.